Japan's vote result raises prospect of fiscal easing

Japan's Liberal Democratic Party won a landslide victory at the weekend on expectations Shinzo Abe's party will expand monetary and fiscal stimulus in a bid to defeat deflation.

Japan's Liberal Democratic Party (LDP) won a landslide victory at the weekend on expectations Shinzo Abe's party will expand monetary and fiscal stimulus in a bid to defeat deflation.

As Japan's seventh leader in six years, he inherits a country in recession, still reeling from the earthquake and nuclear disaster in March last year, and embroiled in a diplomatic dispute with China - all with an upper house election only seven months away.

"Abe's popularity will disappear very quickly if he does something wishy-washy or overreacts and leads Japan into a real crisis with China," said Aiji Tanaka, a political science professor at Waseda University in Tokyo. "If he is calm and handles the situation well, he can keep up the momentum until July."

Mr Abe said he expected the Bank of Japan (BoJ) to take the election results into account and make "appropriate decisions" on easing at its next policy meeting tomorrow and Thursday.

The central bank is expected to loosen monetary policy again.

"The BoJ will probably ease in December and possibly again in January with the political pressure as well," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

A central bank report last week illustrated the challenges Mr Abe will face, with confidence among large Japanese manufacturers sliding to the lowest level in almost three years. The BoJ's quarterly Tankan index fell to minus 12 this month, indicating pessimism, the fifth straight monthly fall.

The world's third-largest economy contracted in the second and third quarters, meeting the technical definition of a recession.

The LDP leader has also called for more control over the islands known as Senkaku in Japan and Diaoyu in China, and has pledged to boost defence spending.

Japan's purchase of the island chain in September sparked violent demonstrations in China and damaged the US$340 billion (Dh1.24 trillion) trade relationship between the world's second-and third-largest economies.

"The relationship with China is one of the most important for Japan," Mr Abe said, while adding that "we are not in a situation where we could hold a summit straight away, or where I could visit China".

Failure to make progress on the economy or regional ties could mean Mr Abe loses support as rapidly as his five predecessors, each of whom was out of office within 15 months.

"In all likelihood, the bloom will be off the rose by next summer's upper house election," said Gregory Noble, a professor of politics at the University of Tokyo.

"The underlying fact is that the economy is terrible and is not likely to get better soon, and as a result voters are unhappy."

The sweeping return to power will be a major focus for investors. This is particularly because the LDP and its junior coalition partner secured more than the two-thirds majority in the lower house needed to override the upper house and break a policy deadlock that has plagued governments since 2007.

The new Japanese government's support for nuclear power could cut demand for imports of liquefied natural gas, curbing shipping rates, according to RS Platou Markets, an investment bank based in Oslo. The world's largest importer of the fuel will reduce costlier oil imports first, meaning 21 nuclear reactors can be restarted before LNG imports need to be curbed, Frode Moerkedal, an analyst at Platou, said yesterday.

An 8 million tonne decline in annual imports would reduce fleet utilisation by 4.5 percentage points, he said. That would have cut spot rates this year to $83,000 a day from $125,000, Platou estimates.

Mr Abe, who said he would form a cabinet on December 26, vowed a "large-scale" budget for government spending. The budget will take into account the gap between oversupply and weak demand in the economy, which the government says is ¥15 trillion (Dh661.17bn).

"We got a lot of support for our plans during the election. Japan is in a crisis in terms of the economy, diplomacy, education and recovery from the catastrophe in the north-east," Mr Abe said.

"The job we have been given is to break out of this crisis."

* compiled from Bloomberg News and Reuters